How do gifts impact Inheritance Tax?
Factoring in the role that gifts play on the value of your estate is essential when it comes to Inheritance Tax (IHT) planning.
We have put together a guide to cover everything you need to know:
What qualifies as a gift?
Some of the assets that can be classed as gifts include:
- Monetary gifts
- Domestic and personal belongings (like jewellery, antiques, and furniture)
- Properties such as houses, land, or buildings
- Stocks and shares listed on the London Stock Exchange
- Unlisted shares you possessed for less than two years prior to your death
- Any financial loss from selling an asset at a lower price than its purchase price (e.g., selling a property to a family member for less than you bought it – the discrepancy is classified as a gift).
What is the Annual Gift Allowance?
The Annual Gift Allowance, which is the amount of gifts you can give away without incurring tax, is currently £3,000. This can be distributed between people and spread over time.
Any unused allowance can also be carried over into the following tax year.
You can also provide small gifts up to £250 per individual each year, tax-free, to as many individuals as you wish, provided they have not received any other allowance from you.
Presents for occasions like Christmas and birthdays, which come from your regular income, are exempt from IHT.
What gifts exempt from IHT?
Some gifts are exempt from IHT, such as gifts exchanged between spouses and civil partners. This only applies if both individuals permanently reside in the UK, and they are legally married or in a civil partnership.
Gifts made to charities throughout your lifetime or in your will are also exempt from IHT.
Charitable gifts outlined in your will could also decrease the rate of IHT due on the entire estate. In the case that 10 per cent or more of your estate is left to a charity, the IHT rate is reduced to 36 per cent.
Marriages and Civil Partnerships
RGifts given in celebration of someone’s marriage or civil partnership have distinct regulations.
Each tax year, you are permitted to give up to:
- £5,000 for a child
- £2,500 for a grandchild or great-grandchild
- £1,000 for any other individual
A gift for a wedding or civil partnership can be combined with the £3,000 gift allowance without incurring tax.
Regular payments
You can offer regular financial support to someone to assist with their living costs, such as paying rent for a child, contributing to an under-18’s savings account, or offering monetary help to an elderly relative.
If these expenses are covered by your usual income, you can combine them with the £3,000 annual allowance for the same person.
Other considerations
It should be noted that any gifts that you have given to someone within seven years of your death might be subjected to taxation.
Under this seven year rule, the tax rate will vary depending on when the gift was bestowed, as this rule employs a sliding scale
When considering matters such as Inheritance Tax planning, it is essential to seek advice from experts. Contact us today.